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US Steel Companies: Is Buffett’s Prophesy Coming True?

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  • US steel companies frequently bash China. They see China’s steel overcapacity and subsidized steel exports as their biggest challenge. US steel stocks sagged despite China curtailing its steel capacity and cutting down on its steel exports.
  • US steel stocks looked weak despite the Section 232 tariffs. All of the leading steel stocks are below the price levels when the tariffs were announced last year.
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US steel companies

US steel companies see Chinese steel overcapacity and the resultant exports as a big challenge. Globally, their counterparts also see China’s subsidized steel exports as a challenge. Several countries including the US have high tariffs in place to prevent Chinese steel products from flooding their markets. President Trump went a step further and imposed a blanket 25% tariff on US steel imports last year. US steel stocks like U.S. Steel (X), AK Steel (AKS), and Nucor (NUE) closed with losses last year despite the tariffs.

Notably, China has taken some measures to cut its excess steel capacity. The country’s steel exports have fallen sharply from their 2015 highs. US steel imports have also come down since the Section 232 tariffs. So far, the developments look encouraging. However, US steel companies’ stock prices have been subdued.

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What’s hurting US steel companies’ stock prices

China’s slowdown concerns and trade tensions have taken a toll on global steel prices. US steel prices can’t be out of sync with global developments. US steel prices fell in 2015 due to China’s slowdown concerns. However, US steel prices bounced back when China’s slowdown concerns eased in 2016. Weak Chinese steel prices and trade war uncertainty lower companies’ pricing power. We should remember that US steel companies announced three rounds of price hikes after US steel prices fell to multiquarter lows in May.

US steel prices

US steel prices rose between June and July. However, the pricing momentum has stalled in August amid the escalating US-China trade war. Steel market sentiments turned negative after the trade war escalated. The US steel industry welcomed China’s designation as a “currency manipulator.” However, rising trade tensions aren’t helping US steel companies’ stock prices.

Stock prices are soaring today

Meanwhile, US steel stocks are higher today. As of 11:00 AM ET, U.S. Steel, AK Steel, and Nucor have risen 3.3%, 0.92%, and 1.2%, respectively. China’s comments about having a “calm attitude” in the trade talks lifted the markets today. Metal and mining stocks are outperforming broader markets due to optimism surrounding the trade talks. We think that US steel companies might be better off if the US and China resolve the trade war amicably. Looking at Warren Buffett’s advice is helpful. In his 2018 annual letter, Buffett wrote, “Americans will be both more prosperous and safer if all nations thrive.” His words might be especially prophetic for US steel companies.

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